Credit cards aren’t an unlimited source of spending power that you can always use – even though some of us tend to treat them that way (you know who you are!).
Each card comes with a credit limit, which is the maximum amount of debt you can have on the card at any one time. The credit limit on your cards affects both your ability to spend with the card as well as your overall credit score.
Why Do Credit Cards Have A Credit Limit?
Lenders put a credit limit on credit cards as a way to control their risk.
Every time you spend money with your credit card, there is a chance that you won’t pay the bill. If you don’t, the bank that gave you the credit card loses money, since they’ve already paid the store where you used the credit card.
Credit card issuers give out millions of credit cards to customers. If they allowed people to spend as much as they want on their cards, there would be a huge risk that the bank would lose money due to customers not paying their bills.
Credit limits allow the banks to control their risk by limiting the amount they can lose from each cardholder. Since you cannot spend more than your credit limit, there’s no way for the card issuer to lose more than that amount of money.
How is My Credit Limit Determined?
Card issuers determine your credit limit using a variety of factors, including your income, your credit score, and your existing credit limits on your other credit cards.
Credit card issuers are primarily concerned with your ability to pay back any debt you incur. No matter how good your credit score is, your ability to pay your bill is limited by the amount of money you make. No bank will give you a $100,000 credit limit if you only make $20,000 a year.
The more money you make, the more credit a card issuer will be willing to extend. If your income significantly increases, your card issuer will likely to increase your limit. Be prepared to show proof of income as some card issuers will ask for proof and may close your account if you cannot provide it.
Your credit score will also affect the willingness of a lender to increase your credit limit because it is a measure of your trustworthiness and history of paying your bill on time. The better you are at paying your bill on time, the more willing the bank will be to take a bigger risk.
Your existing credit limits will also affect how much credit a lender is willing to extend. If you already have $40,000 in credit available to you, and you have an annual income of $50,000 per year, a lender may wonder why you need more credit, and not be willing to offer much to you.
Your existing credit limits effect on the willingness of banks to extend more credit is even greater when you are applying for another card from the same lender.
To a lender, there’s little difference between you having a $10,000 limit on one credit card and you having a $7,000 limit on one card and a $3,000 limit on a second. The total amount the lender could lose from you not paying your bills is the same.
How Does The Credit Limit Affect My Credit Score?
Your credit limits across all your credit cards does have an impact on your overall credit score.
One factor of your credit score is your credit utilization: the percentage of your total credit limit that you are currently using. So, if you have a combined credit limit of $10,000 across all your credit cards and you have a $1,000 combined balance on all your cards, your utilization is 10%.
The lower your credit utilization, the better it is for your credit score, since it shows you are able to handle high credit limits responsibly. If you can find out how to increase your credit limits, but don’t increase your spending, your utilization will be lower and your credit score will increase.
So How Do I Increase a Card’s Credit Limit?
If you meet the lender’s requirements, you can get a credit line increase pretty easily. All you have to do is ask!
Most credit card issuers have an option on their website that lets you request a credit limit increase. If you can’t find the option on your card issuer’s site, a quick search for “how to increase credit limit at my bank” should give you a quick result.
How Often Can I Increase A Card’s Credit Limit?
Most lenders have specific rules around when you can request a credit limit increase and how big an increase you can request.
Usually, you must wait six to twelve months after you open the card or after your most recent credit limit increase. Lenders also usually limit increases, for example, American Express won’t let you more than triple your limit at one time, and generally won’t even let you increase it by that much.
When you ask for a credit limit increase, the lender will usually ask what your annual income is. Sometimes, you’ll need to provide proof such as a recent pay stub. The lender will also ask what credit limit you would like.
Once you enter your income and your requested credit limit, the lender will either approve the increase, reject the increase outright, or offer a lower increase than you requested. So, If your current limit is $5,000 and you request an increase to $10,000, the lender might offer an increase to only $7,500. You can decide whether to accept the offer or not.
Increasing your credit limit is not difficult, but it can have significant effects on your overall credit score.
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